The revolution in manufacturing – increasingly known as ‘global value chains‘ – has changed the world of trade policy as much as it has changed the global industrial landscape. This column discusses new research suggesting that border management and transport and telecommunications infrastructure services matter far more than trade tariffs. Improving infrastructure and management would increase global GDP far more than the complete elimination of tariffs. However, it won’t be easy. Tackling supply chain barriers will require dynamic and responsive national and international trade policymaking procedures that are more in step with industrial practices.

International supply chains have become a fundamental feature of global commerce, with goods being processed – and value being added – in the multiple countries that are part of the chain.

The ability of firms in a country to participate in and contribute to supply chains depends in part on government policies that determine the level of trade and operating costs. These include traditional trade policies such as import tariffs, export restrictions and nontariff barriers such as local content requirements. But in most countries other factors have a more significant impact on trade costs – the efficiency of border management, the quality of transport and logistics services, the need to comply with a plethora of overlapping regulatory requirements and so on (Baldwin, 2012). Even when tariffs are zero, if firms confront high and uncertain border costs and inefficient and unpredictable logistics they will not be able to compete with firms in other countries that benefit from operating in a more efficient economic environment.

Recent research has shown that the different dimensions of national logistics efficiency – as measured by the World Bank’s Logistics Performance Indicators – are the most important determinants of the trade costs that prevail between any given pair of countries (World Bank 2012). Improving Logistics Performance Indicators performance would reduce average bilateral trade costs ten times more than an equivalent percentage reduction in average tariffs (Arvis et al. 2013). The key factor for the ability of a country to participate in supply chains is the efficiency of local trade facilitation and logistics services. Every extra day it takes in Africa to get a consignment to its destination is equivalent to a 1.5% additional tax (Freund and Rocha 2011).

New research

Since the birth of the GATT in 1947, multilateral negotiations have focused primarily on reducing barriers to trade for specific products and sectors: tariffs, subsidies, and different types of nontariff barriers. A recent report by the World Economic Forum, in collaboration with Bain & Company and the World Bank (WEF 2013), Enabling Trade: Valuing Growth Opportunities (World Economic Forum, Bain & Co. and World Bank 2013) concludes that improving border management and transport and communications infrastructure services could increase global GDP by up to six times more than removing all import tariffs. Reducing supply-chain barriers to attain 50% of the global best practice level – as observed in Singapore – could increase global GDP by some 4.7% and global trade by 14.5%. By contrast, the global GDP and trade gains available from complete worldwide tariff elimination amount to some 0.7% and 10.1%, respectively. The gains from reducing supply-chain barriers would also be more evenly distributed across countries than those associated with tariff elimination. A less ambitious set of reforms that moves countries halfway to regional best practice (e.g. Chile in Latin America) could increase global GDP by 2.6% and world trade by 9.4%.

Such large increases in GDP would be associated with positive effects on unemployment, potentially adding millions of jobs to the global workforce.

Supply chain barriers to trade

The 18 case studies that form the core of the World Economic Forum analysis (2013) highlight that clusters of policies jointly impact supply chain performance, suggesting that a concerted approach is needed to cut across different policy domains that collectively generate supply chain barriers to trade. A key problem highlighted by the case studies is that many different policies and administrative procedures can artificially ‘break’ the supply chain by introducing discontinuity and affecting reliability. Supply-chain efficiency is not simply about trade facilitation at the border; it also involves the ability to invest in facilities and protect intellectual property, and the costs of complying with regulatory requirements regarding health, product safety, security, etc. The exercise of market power by a dominant entity that controls access to key services or a lack of competition may hinder the functioning of some parts of a supply chain; examples include port operations, airport cargo handling and freight transport providers. The policy-related factors that affect the operation of supply chains are numerous and interrelated. The cases also illustrate that in practice there may be specific ‘tipping points’ that need to be achieved for reductions in supply chain barriers to have a significant impact on trade: fixing some barriers may be insufficient to trigger investment or scaling up of existing activities if other policies continue to generate significant supply chain costs.

Small and medium-sized enterprises suffer

Small and medium-sized enterprises may suffer disproportionately from supply chain barriers to trade because of the magnitude of the fixed costs that are independent of volumes shipped (Olarreaga et al. 2012). For example, small firms often cannot spend the staff time needed to understand a given country’s idiosyncratic policies and procedures, much less multiple countries. One of the case studies uses eBay data to show that merchants who use the eBay platform to sell goods internationally stick to countries where regulations are easiest to navigate. A pilot project implemented by eBay shows that helping small and medium-sized enterprises navigate the regulatory regimes of importing countries could expand their volume of international sales by 60 to 80%. Given that small and medium-sized enterprises account for a large share of total economic activity, this type of targeted trade facilitation could have significant positive spillover effects on employment.

Policy implications: Think supply chain!

What could be done to realise the large potential welfare gains from an approach to policy focussed on supply chain barriers? The World Economic Forum report makes five specific recommendations:

Create a national mechanism to set policy priorities for improving supply-chain efficiency based on objective performance data and feedback loops between government and firms;

Governments must work with businesses and analysts to determine the policies and procedures that will help reach key tipping points. A central component of this effort should be the creation of mechanisms to collect data on factors affecting supply-chain operations. These data can then be used to identify ‘clusters’ of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.

Create a focal point within government with a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency;

Given the importance of tipping points, governments need to design policy with an economy-wide vision and recognition that industry-specific supply chains are affected by different clusters of policies. Improving supply-chain performance requires coherence and coordination across many government agencies and collaboration with industry.

Ensure that small and medium-sized enterprises’ interests are represented in the policy prioritisation process and that solutions are designed to address specific constraints that impact disproportionately on these businesses;

Because small and medium-sized enterprises’ ability to overcome supply-chain barriers is proportionally more difficult, governments should pay special attention to the needs of smaller businesses. For example, one relatively straightforward policy identified in the report is to raise levels for customs-duty collection that are too trivial to merit serious consideration in order to facilitate small-business engagement in international markets; another is to ensure that initiatives to reduce regulatory compliance costs such as ‘trusted trader’ programmes are complemented by programs that are accessible to small and medium-sized enterprises.

Pursue a ‘whole of the supply chain’ approach in international trade negotiations;

Greater coherence of domestic policies is important, but a key insight derived from the case studies is that coordination across countries matters as well. Joint action will increase the overall gains from lower supply-chain barriers. International trade negotiations usually take a silo approach, addressing policy areas in isolation. Lowering supply-chain barriers requires a more comprehensive and integrated approach that spans key sectors that impact on trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply-chain performance – in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers.

Such a ‘whole of the supply chain’ approach can be pursued both at the multilateral (i.e. WTO) level and in regional trade agreements. Doing so would greatly enhance the relevance of international trade cooperation for businesses and help generate the engagement that is needed for trade agreements to obtain the political support needed to be adopted by national legislatures and to be implemented by governments. As has been argued by many observers, one lesson of the failure to conclude the Doha Round is that what is on the table is not seen to make enough of a difference from an operational business perspective. A supply-chain approach has great potential to address this failure and in the process provide a low-cost economic stimulus for the world economy in the medium term.

Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.

Many of the inefficiencies in the operation of supply chains reflect a lack of reliability due to delays and uncertainty stemming from manual paper-based documentation, redundancy in data requirements and the absence of pre-arrival clearance and risk management-based implementation of policy. A global effort to adopt common documentary and electronic data/information standards would reduce administrative costs, errors, and time associated with moving goods across borders.